It is also relatively easy to get a short term loan where everything is done online – from application to approval.
5. Invoice financing
This type of loan is done by using a business’ accounts receivables – invoices that are, as yet, unpaid by customers. The lender loans the money and charges interest based on the number of weeks that invoices remain outstanding. When an invoice gets paid, the lender will interrupt the payment of the invoice and take the interest charged on the loan before returning to the borrower what is due to the business.
Advantages of Short Term Loans
There are many advantages for the borrower in taking out a loan for only a brief period of time, including the following:
1. Shorter time for incurring interest
As short term loans need to be paid off within about a year, there are lower total interest payments. Compared to long term loans, the amount of interest Interest Expense Interest expense arises out of a company that finances through debt or capital leases. Interest is found in the income statement, but can also paid is significantly less.
2. Quick funding time
These loans are considered less risky compared to long term loans because of a shorter maturity date. The borrower’s ability to repay a loan is less likely to change significantly over a short frame of time. Thus, the time it takes for a lender underwriting to process the loan is shorter. Thus, the borrower can obtain the needed funds more quickly.
3. Easier to acquire
Short term loans are the lifesavers of smaller businesses or individuals who suffer from less than stellar credit scores. The requirements for such loans are generally easier to meet, in part because such loans are usually for relatively small amounts, as compared to the amount of money usually borrowed on a long term basis.
Disadvantage
The main disadvantage of short term loans is that they provide only smaller loan amounts. As the loans are returned or paid off sooner, they usually involve small amounts, so that the borrower won’t be burdened with large monthly payments.
Key Takeaways
Short term loans are very useful for both businesses and individuals. For businesses, they may offer a good way to resolve sudden cash flow issues. For individuals, such loans are an effective source of emergency funds.
More Resources
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